How Significant is a 1% Difference in the Long Run?

Between one percent and ten percent gain, almost all of us will prefer a higher percentage gain in the shortest time possible. We are just tuned that way, always finding ways to cut corners. Just compare the following statements or headlines. Which one will entice your attention the most?

a. Lose 10% body weight in a month, or

b. Lose 1% body weight each month for the next ten months

a. Gain 10% advantage over your opponents in a month, or

b. Gain 1% advantage each month over your opponents for the next ten months

a. Gain 10% investment profit in a month, or

b. Gain 1% investment profit each month for the next ten months

a. Reduce expenses by 10% in a month, or

b. Reduce expenses by 1% each month for the next ten months

I’m sure most of us will prefer the statement “a” for all four options. In theory, no harm to go for option “a” if we require or forced to produce quick results. The issue comes when we then decide that fast results are the way for all our endeavors. Too much effort or restraint in a short space of time will eventually lead to burn out or worse giving up and failure.

Quick Gain, Quick Loss

Early last year, simply by incorporating intermittent fasting, I managed to lose 7.5 kg body weight in three weeks. It was quite impressive, but my weight plateau on the fourth week. Then I started doubting myself and grew tired restraining from eating and eventually I was back to my old eating habits. Within the next few weeks, my weight was back to what it was before I started intermittent fasting. 

When it comes to investments, if an investment can grow 10% within a short space of time, it also means it can drop 10% quickly. That is the risk aspect of an investment, whereby higher risk is either higher return or higher loss.

In regard to expenses, if one day you decide to go cold turkey and cancel your Astro or Netflix subscription, how long do you think before you feel miserable and end up re-subscribing to those services?

In sports, how often have we witnessed a team or athlete’s performance spiraling down after reaching their peak rather quickly?

Diet, Consistency and Patience

In classical Greek, the word diet is diaita. It means “way of living“.

The day I realized weight loss is an effect of living and eating healthy, I started paying less attention to my weight and concentrated more on improving “gradually” my eating and living habits. I wasn’t interested in quick gain because based on my own experience, I know I won’t be able to follow through. Instead, I needed to build new habits and to build new habits I had to introduce changes in small dosage.

It’s through this experience of small changes when I finally understood the significance of one percent difference over the long run. During this long process, there will be days when I feel there are no changes or worse when my weight goes up instead. I’ll have to constantly remind myself, it’s not about the weight but simply being consistent with my new lifestyle till it becomes the new norm (habit). The qualities or virtues I require during this phase are consistency and patience. The results will come eventually.  

The Power of 1%

Compound interest is the 8th Wonder of The World

Albert Einstein (no evidence of him quoting this line though 🙂 )

On face value, one percent seems insignificant. I’ve heard people saying “Why make a big fuss over a 6% return against 5%? A mere 1% difference hardly makes a big difference to your investment.” I’ll be honest, I feel the same too till I started working on the mathematics and plotting the results into a chart.

Do have a look at the below chart on “The Effect of Compounding RM 10, 000” over the years across different return percentages. Best viewed by clicking the image to enlarge it.

Click image to enlarge

Below are some observations from the above chart:

1. In the first 5 years, the differences are quite insignificant

2. From 10th year onward, you’ll start noticing the lines moving away from each other

3. From the 15th year onward, there is a clear daylight between the lines and the lines of 8% and 10% return start growing exponentially

4. From year 20th onward, we can start observing a clear difference in the total profit

5. On the 30th or 35th year, I’ll let you to do your own observations

6. How do you think the lines will move after year 35?

While the chart was plotted as investment return, you may apply the same compounding concept when it comes to knowledge, mastering a new skill or the effect of being lazy. It’s a small and rather slow process but they compound over time.

This is also true when you take a bank loan, hire purchase or mortgage. (Now you know why bank loves to offer loans with longer tenure)

The chart also explains why companies engage in cost cutting exercises. 1% cost cutting in the long run can be worth millions of savings for these enterprises.

EndNote

Every 1% matters. They may seem small, but it is a significant amount in the long run. Having said that, it is definitely not an easy process to go through. As mentioned earlier, being patient is one of the main attributes required for long term gains.

Do check out my previous post Compounding, Time and Patience. I shared James Clear’s “Valley of Disappointment” concept, illustrating why we tend to give up half way through the compounding process.

In case you are wondering, I have managed to reduce my weight from 105 kg in Dec 2018 to around 83 kg now, Feb 2020. There were so many successes, hiccups and laziness (sometimes for months) during the process but I learned the power of 1% and gained a lot, both mentally and physically plus emotionally too.